Airlines to get earnings boost from lower oil prices: IATA

SINGAPORE — The near-term outlook for global carriers such as Singapore Airlines (SIA) appears rosy, with the International Air Transport Association (IATA) forecasting yesterday that falling oil prices will help the industry post higher-than-expected record earnings this year and gain a further 25 per cent in its bottom line next year.

Benchmark Brent crude prices have collapsed to a near-five-year low at below US$66 yesterday since the Organization of the Petroleum Exporting Countries agreed to leave its production ceiling unchanged on Nov 27, sparking a surge in the share prices of airlines.

SIA rose 2.14 per cent to close at a year-to-date high of S$11.44 yesterday, while rival Qantas Airways gained 0.42 per cent to close at A$2.39, more than doubling in the past 12 months.

At a briefing in Geneva yesterday, IATA chief executive officer Tony Tyler said: “The industry outlook is improving. The global economy continues to recover and the fall in oil prices should strengthen the upturn next year.”

While jet fuel previously accounted for as much as 40 per cent of total costs for airlines, it will comprise a significantly lower proportion next year, which may contribute to a decline of about 5.1 per cent in round-trip fares, before tax and surcharges, said IATA.

Coupled with stronger economic growth, airlines are likely to post a 25 per cent gain in earnings next year, the association said.

With lower oil prices, the share prices of SIA and its peers are expected to remain buoyant, said Mr Ellis Taylor, Asia finance editor of aviation news website Flightglobal. “What we are seeing is part of a global trend. Airline shares are now back in favour due to the dip in oil prices and there is more confidence in the airline market now.”

CIMB analysts estimated that SIA could reap an estimated S$1.2 billion in savings if oil prices fall by US$25 a barrel, noting that the carrier burns through 37 million barrels of jet fuel annually.

SIA reported a 51 per cent rise in second-quarter operating profit, helped by lower jet fuel costs. Still, its net profit slid 43 per cent as intense competition hurt the earnings of its associate companies.

The extent to which airlines can benefit from lower oil prices depends on their hedging strategies against jet fuel costs. Airlines typically buy significant volumes of jet fuel in advance at future, pre-determined prices to protect their bottom line from volatile price movements.

But SIA had hedged 65.3 per cent of its jet fuel needs at an average of US$116 a barrel in the six months to March, when spot prices were around US$85, which could lead to paper losses for the airline. OCBC investment research analyst Eugene Chua noted that as at the end of September, SIA had already hedged 35 per cent of its 2015 needs.

“While we do think the lower energy prices will help SIA, the impact will be negated by depressed yields and hedging in place. Meanwhile, we think the effects of the recent slide in oil prices will be more visible from early 2016 onwards for SIA,” said Mr Chua.

Mr Brendan Sobie, chief analyst at market research firm Centre for Aviation, concurred, saying he was cautious about SIA’s profit outlook. “SIA has a lot of its fuel hedged, so the benefit from falling oil prices would be reduced. There are also other challenges; there is a lot of competition in the market and overcapacity issues.”